Contractual Stability Amid Foreign Aid Volatility: Is it Time to Rethink Risk Allocation?

Foreign aid disruptions, such as funding withdrawals or policy shifts, pose significant challenges for service providers, NGOs, and contractors in Kenya. While these events often precipitate financial strain, the Kenyan legal framework offers robust mechanisms to manage contractual relationships effectively.

This article examines key legal principles under Kenyan law, highlighting their application to donor-funded projects and emphasizing proactive strategies for resilience, with specific circumstances referenced only to illustrate broader concepts.

Contractual Risks Under Kenyan Law    

Kenyan contract law, rooted in common law and statutes like the Law of Contract Act, provides a structured approach to addressing disputes arising from disrupted aid projects. A fundamental concern is the risk of breach of contract when external funding ceases. Under Section 2 of the Law of Contracts Act, a contract is enforceable when parties have mutually agreed to obligations with the intent to create legal relations. When unforeseen events, like a donor’s withdrawal of support, impede performance, affected parties may face claims for non-performance, unless excused by contractual provisions or legal doctrines.

Force majeure clauses are often central to such disputes. These provisions, if included, excuse non-performance due to events beyond the parties’ control, such as natural disasters or governmental actions. Kenyan courts interpret force majeure narrowly, requiring the event to be explicitly covered by the clause or clearly within its intended scope. For instance, a clause specifying “acts of government” might encompass a donor’s policy shift, but absent such clarity, parties may struggle to invoke it. Alternatively, the doctrine of frustration under Section 56 of the Law of Contract Act offers relief if an unforeseen event renders performance fundamentally impossible or radically different from what was agreed. Courts apply this doctrine judiciously, ensuring the event was neither foreseeable nor induced by the claiming party.

Termination clauses also play a critical role. Contracts in donor-funded projects may include termination for convenience provisions, allowing parties to end agreements with notice and compensation for work performed, or termination for default clauses, which impose liability for unjustified non-performance. Distinguishing between these scenarios is essential to determine rights and obligations, particularly when external disruptions affect project viability.

The Doctrine of Privity of Contracts and Payment Challenges 

The doctrine of privity of contracts further complicates matters for subcontractors in donor-funded ecosystems. Subcontractors typically contract with prime contractors, not donors directly, meaning they cannot claim payments from entities like a withdrawing donor. When funding cuts impair a prime contractor’s ability to pay, subcontractors may face delays or non-payment, especially under “pay-when-paid” clauses that condition payment on the prime contractor’s receipt of funds. Kenyan courts generally enforce such clauses unless they contravene fairness or public policy, underscoring the need for subcontractors to negotiate protective terms upfront, such as guaranteed payment schedules or indemnities.

Legal Strategies for Mitigation 

Service providers can navigate these challenges through careful legal planning. A comprehensive review of contract terms, focusing on force majeure, termination, and dispute resolution provisions, is essential. Many donor-funded contracts include arbitration or mediation clauses, offering efficient alternatives to litigation in Kenya’s often congested courts. These mechanisms can facilitate negotiated outcomes, such as revised payment terms or partial settlements, preserving business relationships while addressing financial realities.

Where performance becomes unfeasible, invoking frustration or impossibility may serve as a defense against non-performance claims, though success depends on demonstrating the disruption’s unforeseeable and transformative impact. Proactive engagement with counterparties can also mitigate disputes, fostering collaborative solutions over adversarial proceedings.

Future Outlook

The broader lesson from foreign aid volatility lies in strengthening contractual and regulatory frameworks. Kenyan businesses should prioritize clear, comprehensive contracts with robust risk allocation, such as detailed force majeure provisions or payment guarantees.

In addition, with donor dynamics shifting, Kenyan and regional regulatory frameworks for development contracts may evolve. We foresee new legal protections being introduced to safeguard local businesses from the financial instability caused by sudden project cancellations.

Conclusion

The sudden withdrawal of funding can expose service providers to significant financial and legal risks. In case of funding withdrawal, businesses must act swiftly to assess their contractual liabilities, explore legal defenses, and engage in proactive risk mitigation.

Should you require more information please do not hesitate to contact Ivia Kitonga at mail@kitllp.com .

The content of this alert is intended to be of general use only and should not be relied upon without seeking specific legal advice, from an advocate, on any matter.